[THE INVESTOR] Last week, the government said it would draw up a supplementary budget worth 10 trillion won ($8.69 billion) in its unveiling of its second-half economic policy direction.
A package of stimulus might be necessary in terms of overcoming the weak recovery in exports and domestic consumption as well as uncertainty from the Brexit scenario. But in a different aspect, the planned government expenditure is arousing concerns over possible deterioration of fiscal soundness amid a recent surge in sovereign debt.
The sovereign debt has come to 590.5 trillion won at the end of 2015, up 57.3 trillion won from the previous year. Furthermore, the ratio of government debt to gross domestic product, which stayed below 20 percent in the early 2000s, shot up to 38 percent last year.
The nation’s government debt grew 12.3 percent per annum on an average for the past decade. Korea’s on-year debt increase has exceeded that of some eurozone countries, which suffered fiscal woes -- Portugal with 10 percent, Spain with 7.5 percent, Greece 6.4 percent and Italy with 3.4 percent.
The problem starts from the situation in which the government pushes for fiscal expansion without raising corporate taxes for conglomerates.
There is a need to contemplate whether such a policy move is reasonable as the government was already operating at a deficit.
It is paradoxical that the Finance Ministry has also acknowledged that that the ratio of national debt to GDP will further increase by about 2 percentage points to 40.1 percent in 2016.
The finance balance between earnings and expenditure is also projected to worsen to negative 2.3 percent later this year, from negative 2.1 percent in 2015.
This year will likely be the first time in Korea’s history that the national debt-to-GDP ratio topped 40 trillion won. And the figure is projected to surge to 41 percent in 2017, according to earlier analysis from the ministry.
Though the ministry has predicted that the fiscal deficit will continue through 2019, it is just soothing the public, saying that the fiscal deficit balance will improve to negative 0.9 percent within three years.
On Monday, the government reiterated its stance that it would not carry out corporate tax hikes. Prime Minister Hwang Kyo-ahn said that the government would “seek to expand the tax revenue base, reducing tax waivers rather than increasing taxes.”
Hwang made it clear that policymakers would “make efforts to lower the burden on local companies by avoiding unnecessary tax audits.”
However, the administration should be alert to the possibility that its economic policy, which seeks to boost growth with borrowed money, could eventually lead to insolvency of both the nation and households.
Indisputably, it would be difficult for the government to attain a balanced fiscal account if it refuses to raise taxes on earnings of corporations.
The nation’s business sector has recently enjoyed a falling income tax rate, which is estimated to further drop to 17.8 percent in 2019.
The most vexing possibility is that the government will seek drastic hikes of a variety of consumer taxes charged on individuals when the fiscal balance worsens in the coming years.